M&A: Finding the Right Match

This article appears in the November 2011 issue of HealthLeaders magazine.

After years of flat activity, billions of dollars worth of hospital mergers and acquisitions are having a profound effect on the industry. Hospitals of all sizes are being wooed and won as national hospital chains and regional competitors look to grab a bigger share of an increasingly consolidated market or, in some cases, simply to survive.

Late last year, 86% of healthcare leaders were projecting increased activity in 2011 for the acute care hospital sector, according to the HealthLeaders Media Intelligence Report Hospital Mergers & Acquisitions: Opportunities and Challenges. And in the first nine months of this year, 132 hospitals were involved in 71 deals valued at $6.9 billion, according to Sanford Steever, editor of The Health Care M&A Monthly for Irving Levin Associates, which maintains M&A databases on the healthcare industry. With three months to go in the year, Steever notes that 2011 has already outpaced 2010 in terms of dollars spent ($5.8 billion), has surpassed the number of hospitals involved (126), and needs only three more deals to match the 2010 pace.

While typical hospital M&A drivers are still at play—the economy, declining Medicaid and Medicare reimbursements, and health plan consolidation—healthcare reform is also playing a role. The reduction in the number of uninsured, the expected explosion in the number of newly insured, and the emphasis on operational efficiency, care coordination, and quality outcomes have heightened interest in new partnerships.

Steever says the M&A deals he tracks don’t fall into any particular categories in terms of the size of hospitals involved. He is seeing more focus on the development of local and regional delivery systems, which are easier to manage than more geographically diverse systems. The lagging economy has been particularly tough on small critical access hospitals, which may struggle with wide swings in revenues from year to year. These hospitals are looking for mergers that include a cash infusion to help steady their finances and add services to the community.

There are so many hospitals interested in making a deal, finding a potential suitor is almost the easy part. The hard part, of course, is finding the right suitor. More than half of respondents to the M&A Intelligence Report said identifying an acquisition target is a challenge (61%), though the more challenging matters are access to capital (96%) and agreement on valuation (92%).

As the industry reshapes itself and strategic affiliations become increasingly viable, it’s important for healthcare leaders to appreciate what makes a hospital or health system an attractive M&A participant, when to make a deal, and what makes a deal go bad.

Filling a need

Every hospital and health system considers a merger or acquisition with one question in mind: What’s in it for me?

Michael Dowling, president and CEO of North Shore-Long Island Jewish Health System, knows a thing or two about M&As—his health system has been through 15. He keeps an eye on the market to understand the situations of local hospitals. He wants to be able to understand their needs and how they might help Manhasset, NY–based North Shore-LIJ achieve its goals.

In 2010 Lenox Hill Hospital in Manhattan merged with North Shore-LIJ. Dowling said he realized many years ago that it was inevitable that Lenox Hill, a stand-alone hospital, would need to join a health system. “I kept myself apprised of the hospital. I talked to people. I knew what was going on there.”